Take Advantage Of Donald Trump's Tweets To Buy Top Biotechs

Everytime Donald Trump tweets about drug prices, biotech stocks take it on the chin. Bruce Pile believes these episodes are giving investors good entry points for some of the best names in biotech.

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Bruce started his Marketocracy fund in January, 2001. For the past 16+ years, he has outperformed the S&P 500 almost 1% a year. For the last 3 years, he has outperformed the average U.S. equity mutual fund manager in Morningstar’s database. Before taking anyone’s investment advice, you should always check out their track record. Here’s Bruce’s.

Ken Kam: Biotech was red hot until mid 2015, when it fell sharply out of favor. Lately, President Trump’s tweets regarding drug pricing have made these stocks even more risky. Is there anything compelling right now about the group?

Bruce Pile: If you are a Dogs of the Dow fan that likes to buy what others hate, that alone may be compelling. But there is another compelling reason to look at these stocks -- The Human Genome Project. It was to be a 15 year globally coordinated effort that would map and sequence the human genome completely so that we could begin developing a new kind of medicine.

The project was completed around 2003, two years ahead of the 15 year schedule and under budget. But practical, disease killing applications have not exactly been sprinkled on us like magical fairy dust. There is a kind of Moore's Law at work in getting genomic medicine into our everyday life. In the early 2000s it cost about $50 million to get your genome mapped. That has steadily declined to less than $1000 now - something akin to getting a tooth pulled, but less painful.

Kam: What are we doing with this new body of knowledge?

Pile: The traditional approach to medicine has been to introduce chemicals concocted for a mass audience into your particular body to stop some bad thing it is doing. Because we're all different, that typically is done at the expense of upsetting the body's intricate chemical balances, producing a new set of problems. The era of side effects has resulted. A hundred years from now, this will seem like applying leeches.

The new genomic medicine has a basically different approach in that it seeks to fix problems by having our body just do what it was designed to do - genetically. And this can now be tailored to each of our individual genomes. It uses the body's own processes to fix problems. That’s what "immunotherapy" is all about. It uses the body's own immune system to search and destroy disease.

A genetically correct body would never get most of our debilitating disorders. It is only when genes are damaged or not working right that we are programmed to problems. As they say in this science, we will stop endlessly treating symptoms, and simply fix the programs.

That all sounds good, but of course it's all very complicated, and treatment is tricky and investing even trickier.

Kam: Is there a good, reasonably safe way to invest?

Pile: Unless you're a doctor, probably the best way is to analyze, not the stocks, but the insiders buying the stocks. There are, of course, the officers of the company; and a sudden rash of buying or selling by them is often a good tell. But I like to focus on another type of buyer - the cross company career buyer. These are the very few who are often highly educated in the medical field and also are 10% owners and/or sit on the boards of several of these companies, and do massive, informed buying.

They also like to run biotech hedge funds and, because they know not only medicine, but the business of medicine, they tend to have dazzling track records of performance. There funds are not for everyone as the downdrafts are huge and the sector risk is extreme. But the buying by these very smart people should command your attention.

My personal favorite for medical insiders to watch is the Fabulous Baker Brothers (no relation to the 1989 musical). Felix Baker owns a Phd in Immunology and is the most massive inside buyer I know of. Julian Baker holds an A.B. Magna Cum Laude from Harvard (social studies) and this blend of intelligence founded Baker Brothers Investments in 2000, which offers their hedge fund, Baker Brothers Advisors, among a family of funds for institutional investing. Together, they are on the boards of several medical companies.

The Bakers' fund tends to run just a handful of heavy-weighted positions although they spread the money out over nearly a hundred names. What strikes me about the names they buy heavily is the high buyout rate. For example, as tabulated by J3 Information Services, thefund's holdings, in heavy positions at the end of 2013 were : ACAD, SLXP, XOMA, GHDX, SGEN, PCYC, INCY, and GEVA. Of those eight, four have been bought out at fat premiums. That's a .500 batting average for takeout home-runs in just three years.

Kam: Are you recommending we invest in a Baker Brothers Biotech fund?

Pile: Well, no. They do well, but I find it more helpful to look at the yearly progression of the personal buying by the Bakers. When total yearly buying goes over around $20 million, the Bakers tend to do massive personal buying in some of these stocks, often dwarfing the fund buying, and very big climbs tend to start within three years or so. This only happens with about a half dozen stocks at a time, but when it does, you should pay attention. As an example, let's look at Incyte Corp.

After declining to flat stock action for many years, the Bakers began $30 M plus yearly buying in '07, '08, and '11, accumulating something like a $10 cost basis before the run to over $100. They apparently think the run is far from over with Julian buying an astonishing $260 M worth in '16, not to mention 10.6 million shares of non open market acquisition in February, 2017 per Morningstar, worth roughly $1.4 billion.

The Bakers seem to gravitate to the new genetic medicine. Incyte was a groundbreaking leader in the genomic revolution as Incyte Genomics, Inc. and was going about selling its library of mapping until the Moore's Law effect mentioned above made this an impractical business model. So they morphed into one of the best disease fighters after 2004, recently ranked #4 on Forbes The World's Most Innovative Companies list.

Synageva BioPharma Corp. (GEVA) does recombinant genetics, and it also caught the attention of the Bakers. The company was formed when a Genzyme executive "was approached in early 2008 by Baker Bros. Investments to be the CEO of privately held Avigenics, Inc." according to the Wikipediaaccount, and this later went public as GEVA. If you construct a chart as above for the Bakers' buying, you find that after a decade of declining to flat stock performance, they bought $75 M of GEVA in '12, $200M in '13, and $267 M in '14 at an average stock price ranging from roughly $110 to $150. I bought GEVA based on this Baker activity and was rewarded with a $230 buyout of GEVA in May, 2015 by Alexion Pharmaceuticals. It "was the one of the largest premiums paid to any company over $5 billion in market cap since 1995" (Wikipedia).

Another rare case of Baker yearly buying going over the $20 M mark was Pharmacyclics (PCYC) where, after a decade of slumber, they bought a little over $15 M in '11 followed by about $24 M in '12 at prices ranging roughly between $10 and $60. PCYC was bought out in early 2015 at $261. And in mid 2013, Felix forked over $58 M at about $14 to buy some ACAD; it's now worth over twice that.

Kam: Do the Bakers ever get it wrong?

Pile: Of course the Bakers are human, and they can buy big losers as well, especially in the funds they operate. But when they persistently go much over $20 M in personal yearly purchases, the success rate is extraordinary. There is one stock, not bought out yet, that has received the most intense Baker insider buying I have ever seen, and they operate squarely in the new medicine area. Genomic medicine is crossing an important threshold as noted in anarticle "Casey Analyst Forecasts Explosive Biotech Growth", from late 2012. In this interview with Casey's Research, they were asked about breakthroughs in the concept of using the body's immune system to deliver engineered cancer killers. Two were discussed:

“The first is the recently approved use of antibody-drug conjugates (ADCs). Seattle Genetics (SGEN) is the leader in this space, and its ADCs are created by bonding traditional chemo with antibodies selected from our own bodies that target very specific cancer cells. Chemotherapy, which is known as the "poison" in the oncological lingua franca "slash, burn, and poison," does precisely that to the entire body, causing horrific side effects in many patients. By piggybacking on the body's own mechanism for targeted immune response, chemotherapy can be rendered basically inert except when it comes in contact with cancer cells. This means more chemo can be delivered safely, working wonders on metastatic cancers and other difficult-to-target, small, multiple-growth cancers.”

From theSGEN site, we see that genomic science is facilitating all this as they:

“:... have also formed a strategic collaboration with Oxford BioTherapeutics to jointly discover novel ADCs for cancer. Under the collaboration, OBT will generate panels of monoclonal antibodies against novel tumor-specific antigens identified using its proprietary Oxford Genome Anatomy Project database”

“A little science background is required to see why this matters. Other biotech companies have had a lot of success with targeted therapies over the past decade, making genetically engineered antibodies that specifically zero in on markers on tumor cells, while mostly sparing healthy cells - unlike typical chemotherapy. Seattle Genetics has gone a step further, by turning genetically engineered antibodies into what amounts to a “smart bomb” against cancer. The company’s technology links the targeting antibody to a potent toxin, which gets unleashed on the tumor.”

This idea of putting a cancer poison warhead on a genetically crafted antibody missile isn't new. As the article explains:

“Most of these efforts to soup-up antibodies have failed over the years, but Seattle Genetics proved it had solved the puzzle last year in a pair of clinical trials.”

So this 2011 piece claimed that Seattle Genetics "proved it had solved the puzzle last year" inducing the company to "quickly put together its commercial game plan." This was 2010, which interestingly enough was the year the Bakers began their massive buying of the stock in earnest:

This is extraordinary, and it is the most intensive buying I have seen from the Bakers, or anyone. That's about $1 billion of one person's personal bank account invested in one dangerous stock.

Since the Bakers began buying up shares of Incyte and Seattle Genetics hand over fist, Incyte has not only been placed in the top five World's Most Innovative Companies list by Forbes, they have been added to the Standard & Poor's 500 index as announced on Feb 24, 2017. This will dictate some index fund buying. The Motley Fool announcement went on to say:

“Incyte will be a fine addition to the S&P 500. It has a fast-growing drug franchise in Jakafi, a decent pipeline, and after a string of high-profile pipeline failures from competitors, faces close to zero competition for the drug's market opportunity. The company has staying power -- and so does today's move.”

And the "going commercial" plans of Seattle Genetics have been proceeding with a Feb 10, 2017 announcement of a major deal with Immunomedics to license one of the cancer "smart bombs" that has received Breakthrough Therapy Designation from the FDA. According to Cynthia Sullivan, CEO of Immunomedics:

"After a long and robust process, we concluded that licensing our lead asset, sacituzumab govitecan, to Seattle Genetics, the leading ADC company, would give us the best opportunity to advance this product on behalf of advanced stage cancer patients."

Looking at insider buy figures like those above may prompt one to sell the kids and bet the farm on whatever people like the Bakers are buying heavily. But be advised that, as in the '90s with the revolutionary internet, genetic medicine is here to stay - but most of the stocks will go away. The key insiders will likely be our best guess for the stocks that will be the mega winners.

My Take: Biotech stocks are aggressive investments. When everyone is excited by their prospects, stock prices can skyrocket on the basis of clinical results that are still years away from FDA approval and revenue. On the other hand, when the outlook gets cloudy, Wall Street has proven time and again that it will sell first and ask questions later sometimes resulting in losses of 25% to 50% in a single day.

When the reason for a biotech stock's decline is unrelated to its clinical results -- as is the case with Trump's tweets -- I think it does create good entry points for the best biotech stocks.

As a value investor, Bruce Pile has learned to look for indications or catalysts that can trigger a reevaluation of a company. One such signal is when he starts to see the world’s movers and shakers get behind a company as he described in this article about Bear State Financial.

I think Bruce demonstrates here the kind of research it takes to successfully execute a value investment style in the biotech sector.

To explore whether Bruce’s portfolio makes sense for you, send me a message and I'll schedule a time for us to talk.

Disclosure: I am the portfolio manager for a mutual fund advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.

I am the CEO and founder of Marketocracy, Inc.,and portfolio manager at Marketocracy Capital Management, LLC. My firm maintains a database of the world’s greatest “unknown” investors. I require these “Marketocracy Masters” to outperform the S&P 500 for a minimum of 5 yea...